Allegiant Travel Co (ALGT) 2012 Q2 法說會逐字稿

Welcome to the Allegiant Travel Company's Second Quarter 2012 Financial Results Conference Call. We have on the call today Maury Gallagher, the Company's Chief Executive Officer and Chairman; Andrew Levy, the Company's President; and Scott Sheldon, the Company's Chief Financial Officer.

Today's comments will begin with Maury Gallagher followed by Andrew Levy, then Scott Sheldon. After their prepared remarks, we will hold a short Q&A session.

We wish to remind listeners to this webcast that the Company's comments today will contain forward-looking statements that are only predictions and involve risks and uncertainties. Forward-looking statements made today include, among others, references to future performance and any comments about our strategic plans. There are many risk factors that could prevent us from achieving our goals and may cause underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in or implied by our forward-looking statements.

These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission, any forward-looking statements based on information available to us today, and we undertake no obligation to update publicly any forward-looking statements whether as a result of future events, new information or otherwise. The Company cautions users of this presentation not to place undue reliance on forward-looking statements, which may be based on assumptions and anticipated events that do not materialize.

The earnings release, as well as the re-broadcast of this call, are available on the Company's Investor Relations site, IR.allegiantair.com. At this time, I would like to turn the call over to Maury Gallagher for opening remarks.

Thank you, Operator. Good afternoon, everyone -- welcome. It's a pleasure again to talk with you this afternoon. As the operator indicated, joining me today are Andrew and Scott.

I'm happy to say we had a very nice, profitable quarter -- our 38th consecutive profitable quarter. We had net income of $25.2 million, or $1.30 a share as compared to last year's $11.9 million operating income and $0.62 per share.

Revenues during the quarter increased 15% to $231 million. But, year-over-year, operating profits increased over 100% to $41.9 million -- clearly, a terrific outcome. These results represent an 18.1% operating margin compared to 10% in the same quarter last year. Additionally, this represents the first time our second quarter results have exceeded our first quarter results, which, typically, is our strongest quarter of the year.

We successfully completed one of the most substantial undertakings in the history of our Company this past quarter; namely, the launching of our Hawaii service. We have been very pleased with the initial results, and we are optimistic about our long-term future in this great destination market.

This was, indeed, a major undertaking for us, and I want to personally thank all of our team members who worked diligently to complete this effort. Once again, our people have been up to the task. They continue to allow us to separate from the pack.

Our non-fuel unit cost was down 14% -- a very, very good result. Maintenance, in this instance, was the big driver in this reduction. We've been commenting during the past year or so that we were experiencing a bulge, if you will, in maintenance outlays, particularly with regards to engines. This bulge has passed, and we are seeing the benefits. Last year we spent almost $13 per passenger in this quarter for maintenance, while this year's total is $8.41. That's a 35% decline year-over-year.

The remainder of the expense accounts, we saw all unit cost declines in every category save depreciation and amortization. An 18% growth in ASMs year-over-year and modest increases in absolute costs, will generate these reduced amounts.

If you've studied our guidance during the past 12 months, one could see these results coming. In particular, we are seeing the benefits of our increasing seats per departure through our fleet. Passengers per departure increased 3% in Q2 to 140 per departure from 136 last year. Additionally, we had 254 757 flights at 223 seats a departure this quarter versus no 757 flights last year at this time.

The operation of over 21 66-seat MDs during the quarter also gave us more [heft] per departure. And we saw the benefit as well on the fuel front. Gallons consumed per passenger declined to 16.7 from 17.2 in the same period last year, and that's a 3% decline year-over-year.

Looking forward, we will see these additional benefits continuing as we add to our 166-seat MDs and 757s in the coming quarters. And you could see this benefit, I might add, in our guidance. In Q3 we are forecasting a 2% to 6% departure growth, but a 14% to 18% increase in ASMs. Long-term, this represents a substantial increase in productivity per departure and, hence, lower unit costs.

While we were expecting flat unit costs in the coming quarter, we still expect to see a unit cost decrease for the year of up to 10%.

In the coming years, we will continue to benefit from these investments. As we have said many times, solid margins are our main goal. The combination of stable or increasing revenues and declining unit costs provide an excellent formula for increasing margins on a year-over-year basis. Andrew and Scott will have more comments on these aspects in a moment.

It's been a busy quarter with a great deal of activity. We announced our intention to add airbus equipment a couple of days ago. We began our service, as I mentioned, to Honolulu from Las Vegas and Fresno. We also announced additional Hawaii flying from Bellingham and Eugene, Santa Maria, Monterrey and Stockton to Honolulu as well as Bellingham to Maui.

We added our third and fourth 757. We completed -- and have completed, I might add, 31 66-seat MD83s as of today, and we'll have our 31st in service by the end of the week.

I'm happy to say our new website is also operational. This represents a year and a half of planning and hard work. Today, a small amount of our traffic is being handled by it, but we expect all of our traffic to be moved over, hopefully, before year-end but certainly no later than year-end at the end of 2012. We are charging, I might add, for carry-on bags and, lastly, we instituted new departure procedures to allow us to board our aircraft more efficiently and handle our carry-on bag charges. These outcomes reflect investment planning and work by many team members in the Company for the past year to two years, and as a result of all these adds and benefits, I am very bullish on our future.

Changing subjects to our favorite topic, the government. As you know, the court did not see it or way with respect to the consumable 2 appeal. We disagree with the court's conclusions. As a result, we are reviewing with our counsel whether or not to appeal this ruling.

Editorially, the liberal justices of the appeals court have endorsed the minimal standards the DOT has devolved to in recent years. Today, in effect, the unfair and deceptive standards established by Congress for DOT with the Deregulation Act more than 30 years ago is, for the most part, whatever DOT wants it to be. This includes, as an example, a recent dictate by our government to carriers on how to word their website. Again, an unfair and deceptive practice on how we word our website is not what I would call unfair and deceptive.

The Court, by allowing DOT to achieve such a watered-down standard, we believe, has opened the door to all executive functions at the federal level to issue regulations based on whatever may be moving them at the moment. This is a destructive precedent for not only our airline industry but for all businesses that come under the thumb of regulatory agencies.

This past Monday, we made an announcement that we are going to add airbus additions -- or -- airbus aircraft to the fleet. And with that announcement, we have paved the way for our continued growth in the coming years with low-cost productive aircraft.

And I know many of our investors have had an open question about how we would grow. How are we going to maintain our low capital cost, flexible approach that we have developed over the past 11 years? The state of the used aircraft market in our airbus decision provides a number of answers to that and other questions.

As a large shareholder, I am interested personally in continuing to build value for all concerned; our shareholders through increased earnings as well as our team members who look to grow -- look to the Company to grow so they can improve their personal situation.

But as we have said from the beginning, all future plans, all growth, is based on remaining profitable -- solidly profitable. I'm very comfortable with the coming years based on our recent decisions we will be able to continue this 38-quarters profit streak that we have been on. Stay tuned. Andrew?

Thanks, Maury. Second quarter revenue performance was exceptional. Despite ASM growth of 20%, total fare per customer was flat. The base fare was slightly lower, but this was more than offset by a nice increase in ancillary revenue per passenger driven mostly by a $2.45 increase in air-related ancillaries.

This is the first time since the fourth quarter of 2009 in which total RASM outperformed passenger RASM, and we expect this will continue in the third and fourth quarters. This expectation is primarily due to our new carry-on bag charge implemented in April as well as several revenue optimization initiatives implemented for our other products. We expect a meaningful increase in the contribution of the carry-on charge during the third quarter and the first full quarter effect of this new charge will be in the fourth quarter of this year.

We are not prepared to publicly forecast a total RASM number for the third quarter, but we do expect total RASM to outperform past year RASM by a substantial margin.

Demand trends going into the latter part of August and September appear to be only slightly weaker than the normal seasonal pattern when adjusting for our planned increasing capacity, but we remain bullish about the revenue environment in the second half of the year, particularly during the peak Thanksgiving and Christmas holiday season. Of course, if we see a marked deceleration in demand, we have the ability to react quickly by adjusting capacity as we have done many times in the past.

However, a marked deceleration in demand has historically translated into lower fuel prices. We believe the relationship between revenue and fuel is and will remain intact. And as we experienced in late 2008 and 2009, this is about as perfect an operating environment as there is for Allegiant.

Recall, during this period of economic weakness, we posted our best operating margins in the Company's history, and we see little reason why that would not be repeated if, in fact, we do see a broader macro slowdown.

Just to remind everyone, the recession in 2000-2001 and 2008-2009 proved exposure to the leisure market and discretionary travelers is the better segment of the market to be in. And when we see another recession, whenever that may be, we are confident this will be proven yet again.

During the slowdown, business demand is fast to contract, but Allegiant demand can always be stimulated albeit perhaps at lower prices. But the decline in fuel prices offset revenue weakness by a wide margin during the 2008-2009 slowdown, and we expect the same would occur again.

During the second quarter, all parts of our network showed improvement on a year-over-year basis. Particularly noteworthy is our Orlando network. Orlando posted a significant improvement in operating margin percentage despite a 30% increase in departures compared with second quarter 2011. We remain bullish on Orlando, and we plan to grow departures by just under 20% during the back half of the year in this market.

The remainder of the growth in departures for the balance of the year is mostly due to new routes to Hawaii and our new bases in Punta Gorda, Florida, and Oakland, California.

The highlight of our recent network growth is our Hawaii service. It has greatly exceeded our forecasts. We started flights to Honolulu from both Las Vegas and Fresno in the last days of June, so July is our only full month of operations. Despite a smaller-than-ideal sales window of only nine weeks, Las Vegas posted a 97.4% load factor, and Fresno had a load factor of 96.8% during the month of July. Our revenue per passenger was far in excess of expectation for both routes, and this enabled us to post very high profit margins in both markets during July.

Forward bookings on these routes in addition to the six new routes scheduled to commence service in November are all performing very well and meaningfully exceeding expectations. As we introduced our fifth and sixth 757 aircraft into the fleet at the beginning of 2013, we will be adding more routes to Hawaii with announcements forthcoming in the coming weeks.

We spent a lot of time on our decision to introduce the A319 aircraft just two days ago, but I want to add more color to one of the key opportunities this fleet will afford us; mainly, new cities and routes that cannot be served with the MD80 due to performance and range limitations of that aircraft type.

Many investors have been asking us about this, and I think they are right to see this as a whole new leg of growth available for us to pursue in the coming years. We estimate there are more than 20 new airports in the US we will be able to enter, which were not possible with the MD80.

Historically, we've averaged about three routes per small city so we can target more than 50 new routes just in the continental US. Additionally, we have discussed the opportunity to serve smaller Mexican cities to Las Vegas and Orlando, and the MD80 would have dramatically limited the scope of this opportunity. The A319 enables us to potentially serve 10 more markets in Mexico than we could have with the MD80. Bottom line is the A319 has markedly better economics than the MD80 and will also open substantial new growth opportunities for us in future years. We are very excited about this new fleet plan for these reasons.

A more immediate benefit we are seeing from our fleet plan is the value of the 16 additional seats we have been installing in our MD80 aircraft. We now have 30 aircraft in the larger-gauge configuration, and the returns on this are exceeding our forecasts. We have been very cautious about selling the additional seats, not wanting to sell seats until we have strong visibility and confidence in the date each aircraft will come into the fleet with the new configuration.

Despite this cautious approach, which has not enabled us to fully optimize the revenue potential of the extra seats, we have filled 85% of the additional seats on all flights operated year-to-date and the total revenue per passenger is in the low 90s.

Our incremental forecast of cost per passenger, which we have provided in the past, of $40, assuming a 75% load factor, or selling 12 of the 16 additional seats, remains accurate. And, as you can see, we are generating outsize returns from this investment.

As the fleet reconfiguration project proceeds and the entire fleet is converted by the end of 2012 or the very beginning of 2013, we are excited to see the full-year effect of these seats when we have the selling window fully open. This should provide a meaningful opportunity in 2013 to continue to increase our revenue and profit per departure.

With that, I'll turn it over to Scott for a more detailed look into the financial results of the quarter.

Thanks, Andrew. Let me first highlight the balance sheet and liquidity. Our strong cash flow production continued into the second quarter. We generated $34 million in cash flows from operations during the quarter and nearly $117 million year-to-date. This, net of the year-to-date capital expenditures of $61 million, has resulted in nearly $56 million of free cash flow.

Our unrestricted cash, which includes investments in marketable securities at quarter-end, were $390 million, which was up 6% from the end of the first quarter and represents $47 million -- excuse me -- 47% of our trailing 12-month operating revenue.

Our CapEx spend of $29 million during the quarter primarily consisted of the purchase of our sixth and final Boeing 757 aircraft under contract and the continuation of our 166-seat modification project. At quarter-end, we had modified 26 MD80 aircraft from 150 to 166 seats for a total of $24 million. The number of reconfigured aircraft is expected to be 31 by this Friday, at which time we will have successfully replaced all of the West Coast scheduled service flying with 166 seats.

Looking forward to the back half of the year, we still anticipate full-year CapEx of $105 million to $115 million. We ended the quarter with $156 million in total debt, up from $144 million at the end of the prior quarter as we successfully secured $14 million in financing on two 757 aircraft at attractive rates. At quarter-end, our net cash position, as we define as unrestricted cash excluding ATL and total debt, was $77 million.

Our leverage ratios continue to improve with our debt-to-equity ratio now at 39%, down from 43% in the prior year, and our interest coverage is now 19 times.

Finally, our return on equity and return on capital ratios continue to improve and were 18.4% and 14.5%, respectively, at quarter-end.

The organization's successful cost management continued into the second quarter as our ex-fuel CASM decreased nearly 14% to $0.051 from the prior year, which our lowest ex-fuel unit cost performance since the third quarter of 2010.

During the quarter, we did experience some fuel price relief both on a sequential and year-over-year basis. Our cost per gallon was $3.14, which was down $0.08 or 2.6% year-over-year and down $0.14 per gallon since the end of the first quarter. This decrease, in combination with the nearly 12% increase in gallons consumed, drove a system fuel expense of $94 million, or $52.50 per passenger.

Our ASM per gallon consumption efficiency continues to improve as we deploy more 166 and 757 aircraft into revenue service. Our ASMs per gallon increased nearly 6% to 62 ASMs per gallon, up from 58 in the prior year.

On the nonfuel cost front, our cost per passenger ex-fuel decreased $6.83, or 11.4% to just under $53. Some of the largest contributors to this decrease were a reduction in repairs and maintenance expense, marketing, and asset dispositions.

Maintenance and repairs expense decreased $4.50, or 35% from the prior year due to a significant reduction in engine repairs and overhauls, C checks and outside labor.

Sales and marketing expenses were relatively flat year-over-year despite significant growth in scheduled service revenues. During the quarter, our scheduled service revenues increased $31 million or 16.7% while our payment processing costs remained flat. This trend continues to be attributable to a higher usage of debit cards amongst our customer base.

Other costs per passenger decreased $2.18, or 31% from the prior year, primarily due to the retirement of one MD87 and more engine consignment writeoffs in the prior year.

And, finally, depreciation expense per passenger increased $0.82, or 12.6% to $7.33 during the quarter. This was attributable to a 19.6% increase in total aircraft as we introduced eight MD80s and two 757 aircraft to our (inaudible) fleet.

And, with that, we're ready to take some questions.

(Operator Instructions) John Godyn, Morgan Stanley.

I wanted to first just talk about the cost guidance a little bit. We've got two quarters of cost guidance, and the third quarter you guys put out has a pretty narrow range. But the full-year cost guidance of down 5 to down 10 -- that's a pretty wide range with just the fourth quarter left really driving all that variance. Can you just elaborate a little bit on why the need for that range and just hypothetically, sort of, how do we think about what drives the top end versus the bottom end? What are the key kind of factors that you're looking out for?

Hi, this is Scott. There's a couple things in there that we're just looking to be a little more conservative. There's some costs that we know we'll be increasing on the station side. Las Vegas, there are T-3 terminals going to be coming onboard. If you look at the rate increase, that's likely going to be north of 15% on an annualized basis.

If you look at the pre-operating costs for the introduction of the 319s, we think there's going to be a substantial amount of spend in the fourth quarter in addition to the first quarter, which might be [sent] back. A lot of that has to do with just the pace at which the process progresses.

We have mentioned that we will be putting two of the 87s down -- the last remaining 287s down, which means you're going to see a bump up in depreciation both in the third and fourth quarters. And so that's kind of how we're looking at it. Other than that, you know, Andrew, I don't know if you had any other comments?

John, I think we're just trying to be very conservative. I mean, obviously, we have a much tighter range internally, but we thought that today we were just prepared to share the range that we've provided you.

Okay, that's helpful. And on the PRASM guidance, we've got July, the third quarter PRASM guide, and I heard the comments about total RASM and how that's going to work out, and that's very helpful. But just to focus on the PRASM -- we've got July here down 1 to down 3, and then the third quarter is a lot lower than that. Even though August has easier comps, is it fair to look at September as the month that's driving a lot of that downside volatility? Or should we actually think about it as, you know, August is worse than July, and September is then worse than August. Just some clarity on that would be helpful.

John, I think it's exactly what you said. August -- yes, July is definitely -- we expect will show the best performance on a year-over-year basis in terms of passenger RASM. We think August will be less good, and September will be less good as well. So, no, I think that's exactly what we expect to see.

Okay, that's helpful. And just last one on demand, in general. You had some -- you inserted some comments on how good the business model is during tough economic times, and we've seen that in the past. But are you seeing anything in terms of demand trends, bookings, that causes you to be uncertain about the trend or anything that suggests kind of core demand is weak, or was that more of a response to all the headlines and maybe investor concerns that might be out there more than anything that you're seeing in the numbers?

Sure. First of all, let me go back to the last question. Let me add one more thing about the monthly RASM performance we forecast. I think that the capacity growth that we show throughout the quarter also mirrors the results we expect. So the growth in August is greater than July; the growth in September is greater than August. And part of that is just due to the really tight capacity that we had last year during that same period, and we feel really good about the capacity plan for the quarter, I might add.

So -- anyway, as far as your other question -- yes, I think that there's just -- we fought this issue when we went public about this really factually incorrect and empirically proved to be incorrect notion that somehow in a recessionary environment, leisure is where you don't want to be. We think the facts are clear, and they stayed exactly the opposite. And so we're just trying to, I guess, take the opportunity to remind investors that that's -- I guess maybe the next time around it may be different, but we see no reason to believe it would be.

We perform extremely well during the downturn environment, and if we do end up seeing one, then I think we expect that the history will repeat itself. That being said, no, we don't see any trends that are alarming in any way. When we try to strip out the capacity adjustments we have in August and September, which are pretty substantial on a year-over-year basis, and then we try to see, okay, are we doing what you would expect on a seasonal basis? Obviously, back half of August, September, are two of the weaker -- it's one of the weaker periods during the year. And as we look at that, what we see is maybe something that's slightly below normal seasonal patterns, but ever so slight. And we don't see any real -- we don't see any change in the trend line or anything like that, John.

But obviously we're keeping our eye on the macro environment, and at this point, I think that maybe the best way to put it is our capacity plans remain intact and at this point we're not looking in any way of changing that. And, of course, if we see a reason to do so, we will. But at this point in time, we're very comfortable with what we have on the books in terms of capacity in the back half of the year.

Michael Linenberg, Deutsche Bank.

Hi, this is actually Catherine O'Brien filling in for Mike Linenberg. My first question is just to try to get a little more color on the September quarter cost guidance. Is anything specific pressuring that? Just as capacity is growing 14% to 18%, CASM ex going to be flat to down, too? With the capacity grow at this quarter, we saw more substantial decrease in the CASM ex-fuel figure. I'm just wondering what's driving that in the September quarter?

Hi, this is Scott. One of the things I probably should have elaborated on -- if you look at the third quarter of last year, we were introducing the modification lines for four aircraft. Those were four aircraft that were in storage, therefore, they were not being depreciated.

The mod lines that are ongoing this quarter, those are aircraft that we have been -- had in service and, therefore, they are being depreciated. So on paper it's going to look like utilization is going to be down, which is going to put pressure on costs. I mentioned the 87s, we're going to accelerate the depreciation there. July 1 station costs for Vegas are going to increase. But, other than that, there is really nothing outside of those items that is really noteworthy.

Typically, we have a substantial uptick in our unit costs in the third quarter historically just because it's our slowest quarter of the year. And our utilization goes down as we pull in our reins for September and so it's not an unexpected event. We had an excellent quarter in the second quarter, so coming off of that, it might look like it's going backwards. But it's all very explainable, and we're seeing the benefits of all the investments not only next quarter but in the following quarters.

All right, thanks. And just one more on -- I just wanted to know if you could give an early read on the new website and if you maybe had a feel for the incremental revenue you'd be able to see in the fourth quarter and beyond from that?

It's too early to make those kinds of predictions. This is a slow birthing process that is coming about, as you can imagine something as material as this is to the Company on a very basic approach, and the first passes here have been very good. We're down to 10% type of amount of traffic, one in 10 of our events going through it, and as we're just making sure that all the stuff is working right. But very excited about it; we do see revenue enhancement opportunities. Haven't got the quantification or specifics that we want to talk about at his point yet, though.

David Fintzen, Barclay's.

Hi, good afternoon, this is actually Isaac Sweeney filling in for David. The first question, I guess, for Maury or Andrew. I appreciate the color that you gave on Hawaii but wanted to know if you could just frame it throughout the rest of the network. Has Hawaii margins been higher or in line with the average -- in your system? And maybe if you can just also add some color to Hawaii ancillary revenues in hotels?

This is Andrew. We're talking one month of Hawaii service, and I think that they will be -- if you put them together, they'll be in line with the overall network profitability. So July is going to be a very strong month for us, as it always is. And I don't know if we really want to get into any more detail.

(inaudible) Hawaii, too.

Yes, July is obviously a peak month to Hawaii, so I mean in some ways we expected to start off pretty strong but, at the same time, you know, with the fact that we had a short selling window, and obviously started with low introductory fares, we're just particularly pleased that despite those two things, we were able to produce the results that we did in the Hawaii market.

And, forgive me, the second part of your question -- if you could repeat that?

Yes, the second part was just any color that you can provide on the ancillary revenues in hotels in Hawaii?

Sure. So, right now, Hawaii is by far and away our second-highest market in terms of take rate among customers for the hotel product. It's doing -- it's not Las Vegas nor would we ever expect it to be. But the take rate is very nice, and it's climbing. At this point, you know, the Hawaii/Las Vegas service, which is the majority of our service to Hawaii is not a really good bellwether for the Hawaii market because that is such a -- that route is dominated by VFR traffic due to the very large population of Hawaiians that live in Las Vegas.

So that route will be in -- and always has been -- a route that has a lot more balance in demand going both directions. In fact, we're actually selling more rooms in Las Vegas than we are in Hawaii on that particular route. Fresno is a better bellwether, although it's really one flight a week, so it's hard to really make a lot of forecasts based on that experience. But, so far, we're seeing good and accelerating take, and net revenue from hotels on the Hawaii markets, and we do expect that will be very meaningful as we continue selling and flying into that market.

The unbundled ancillaries is really where we've seen substantially better numbers than what we had forecast. We always expected the value of things like a seat assignment would be higher on a longer flight, and that's coming, in spades, to be true, and so we're really pleased with it. And I think the bottom line is that the total revenue, when you add them all three together, that is giving us numbers that are far better than what we anticipated. And, as a result, we're very bullish on the Hawaii market.

I think, just a general statement, Isaac, it's Maury. It's extending our model as we have developed it over the years; namely, low fares, smaller markets. It's stimulating new traffic that otherwise wouldn't have flown to Hawaii. So as we go into our secondary cities, we're very bullish on how that's going to grow and prosper, if you will, and come to the market based on our service levels and our pricing.

Okay, that's helpful. And I guess one for Scott. Going back to the CASM question -- just asking it a bit differently -- with 4Q being -- if I take the midpoint of your full-year guidance on CASM, and I've seen 4Q CASM down 10%. I appreciate that there's a lot going on between the maintenance and G&A and things moving in and out between the quarters, especially with the engine maintenance program from last year. But if we start thinking about just sustainability of CASM against 20% to 25% ASM growth in 2012 -- in 2013 -- what should we think about run rates in terms of CASM, looking forward?

I would hope to see it down similar to what we had seen between the first and second quarters. I think we did $0.0516 last quarter. We did $0.051 this quarter. Hopefully, that's not out of the question moving into 2013, particularly as you have the full contingent of 75 flying, and the full contingent of scheduled service 166 being deployed.

Savanthi Syth, Raymond James.

Regarding the engine maintenance expense, what was the -- could you quantify what that was this year? And is that kind of the new normal? Actually, the overhaul expense -- is that the new normal?

I'm sorry, say it again, please?

Sure. The engine overhaul expense that was down significantly year-over-year, could you quantify that? And I was wondering is this the new normal level that you've reached? Or is there more declines?

If you look at the engine overhaul expense last year, it was roughly $19 million. The historical run rate had been less than 10. I would expect that to be the case, moving forward. Last year the majority of the engine overhaul expenses actually hit in Qs 3 and 4. Off the top of my head, I think we had about a $3 million delta in the second quarter. So a $3 million reduction from what we did last year to what we did this year specifically as it relates to engines.

So -- overall expense, moving forward, definitely less than the $10 million number, which we have historically seen in the past.

Okay. I'm sorry, it wasn't a little clear. So in the third and fourth quarter we should continue to see a decline because it hit the third and fourth quarter of last year, right?

Yes, third quarter and fourth quarter of this year, you should see significant declines and --

On a year-over-year basis is what the -- ?

Sure, yes. It makes sense. And then just a follow-up question -- on the carry-on bag fee, I was wondering if you could kind of tell us how the take rate has been going on the carry-on bag fee as well as the checked bag?

This is Andrew. We're not going to provide you the take rate. Forgive us, we want to keep that one under wraps, I think. But it's meeting our expectations, and I think what we have seen that is something that we hadn't forecast is the effect it's had on checked bag take rate, which has, in fact, gone up. And so we're seeing good numbers in terms of the carry-on fee, in terms of what we're seeing, in terms of recognizing a new revenue stream and, at the same time, an increase in the checked bag that we're capturing.

So we're really pleased with those numbers and, as I mentioned, the third quarter -- the contribution of those two particular items in the third quarter will be up very nicely on a sequential basis just mostly because we'll have more of a -- almost a full quarter effective in the third quarter, which we did not have in the second.

Duane Pfennigwerth, Evercore Partners.

I just wanted to follow up on the TRASM versus PRASM. I guess what was not fully reflected in your June traffic if we look at the difference in those growth rates. And when did you start enforcing the carry-on bag fee at the gate?

Well, let me answer the second part first. We started enforcing it on June 19th, which coincided with the change in our boarding process. And the boarding process, in many respects, was changed in order to help with the enforcement of that charge.

I'm not sure I understood the first part of the question, Duane.

So just -- I think it was, like, 4 percentage points, I think better TRASM versus PRASM and the thought being that that will get wider or get even better, going forward, given that you weren't getting a full contribution in June, and that's the question.

Right, okay, and the answer there is pretty much what we just were talking about a second ago, which is the full -- a fuller effect of the new carry-on charge, which we'll see more of in the third quarter as well as the increases in some of the other air-related ancillaries, including checked bags, and we have some other optimization efforts in several of the other categories of ancillaries that are showing very positive results.

So it's really -- it's the unbundled air ancillaries and growth there that we expect will help continue the trend of total RASM outperforming passenger RASM on a year-over-year basis as we go into the third and the fourth quarter.

Okay, fair. And then just wanted to switch gears around capital deployment. Your earnings this year are high. You've got a lot of cash. Any thoughts on when you might make some decisions about returning that to holders and your preference dividends buyback or something else? Thanks.

Duane, it's Maury. That's a very good question. At this point, it's nice to be sitting on ample resources. With the balance sheet we have, it gives us a tremendous amount of flexibility as we transition into the airbus fleet and things like that, we could certainly look at buying more airplanes should the deals become available -- that's a benefit.

But we're also mindful that returning cash to the shareholders vis-a-vis a possible dividend, share buybacks are definitely something that we've been visiting with our Board about. So as we kind of mature ourselves into these numbers, I think the Street is talking about an average of a $2.00 increase this year in earnings over last year, and next year I think we're seeing Street averages up close to $6.00. So those are certainly going to generate nice amounts of cash that will create our high-quality problems, we like to say.

But stay tuned on that, and we'll be working on it as we go forward.

Hunter Keay, Wolfe Trahan.

Again, to follow up on Duane's question more, just to sort of flesh out a little more what you were saying -- as the largest shareholder of this Company, how do you personally feel about just conceptually the difference between a dividend and a buyback? Which would you prefer, as the largest shareholder of the Company, and how do you think about having a conversation with the Board in terms of which one is better?

Everybody around the table is chuckling in here. Conflict of interest aside, I'd kind of analogize it that, one, you're paying people to leave the Company; and, two, you're paying people who are staying in the Company. Both have their benefits in the plus.

I think the share buyback becomes much more attractive when we're undervalued. And I think -- I'm not sure the Street is getting us up to where we should be, particularly after today, but dividends, on a personal basis, I'm not going to sit here and say they're not interesting, too, particularly given all the tax events that are going about and things like that. But it's been a topic for Board discussion, and we're continuing to have that.

You're saying that any kind of fiscal policy that would impact taxation of dividends would come into the conversation as you guys think about returning cash?

I think so. Paying out a dividend where $0.42 of it goes to -- at least on a personal level -- institutions are certainly different. But that has a personal decision-making that changes my kind of belief versus a 15%. You go to 20%, that's certainly not a 42% number, but when you see dividends ratcheting back up to the old 42%, that, to me, puts a chill on the Company doing things.

And, furthermore, we have a lot of growth left to go, and a permanent dividend at this point might be -- I'm not saying we couldn't support it, but it might be a bit premature just given the opportunities we see out there to continue to invest and grow.

Don't you think that if you were to initiate a regular dividend -- if you're frustrated with where your stock is trading, and it seems like you are, don't you think that the initiation of a regular dividend would send a pretty strong message to the Street that you believe what you're doing is sustainable and that, in itself, should drive the multiple higher?

Hunter, I can't disagree with your logic. We have never done that before, and so we have to sit down and study it. We, frankly, haven't put a lot of time into kind of a repetitive dividend. But I'm not going to sit here and -- you know, that's your side of the house. That's where you guys live, and I've been told that certainly has an influence on investors -- perhaps bringing in a whole other set of investors that need dividend. But we haven't put a great deal of time into it heretofore.

Yes, okay. I think it would -- I think it would send a good message of confidence. Okay, well, thanks, appreciate the time.

Kevin Crissey, UBS.

I know you don't usually advertise in your destinations, but since Vegas has a lot of Hawaiians traveling to Vegas, do you advertise at all in Hawaii?

Kevin, no, as of this point in time, we have not run any paid advertising there and just been relying on PR and word of mouth.

Okay, thanks. And on the hotel inventory side, maybe if we set Hawaii aside, are you seeing any change there in terms of availability of rooms in Vegas and anywhere else?

Kevin, we're not seeing that right now with very limited exceptions. Actually, Las Vegas right now, the hotels, as they look into the fall, are starting to see a little bit of weakness in yield. And as a result, it's exactly the opposite. We've got all the rooms that we could ever want, and rates are coming in a little bit. So we'll see if that continues in the back half of -- during the fourth quarter, but in the shoulder period, in the next couple or three months, we're seeing a little bit of weakness. So no issues there in terms of hotel availability -- not in Vegas and certainly not in any other market where we are offering hotels for sale.

Thank you. This concludes our Q&A session. I would like to turn the call back to Maury Gallagher for final comments.

Thank you all very much, appreciate your time, and we'll talk again in 90 days. Thanks much, bye-bye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.